New EU VAT rules on digital goods could spell Armageddon for European start-ups

18 Dec 20142 Shares

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New EU VAT rules on digital goods to go live on 1 January could be too much of an administrative burden for start-ups and may be counterintuitive to creating a Single European Market for digital goods and services.

As reported yesterday new VAT rules that will only affect providers of digital services, such as telecoms, software and streaming, will come into effect on 1 January ostensibly to simplify online processing of VAT returns based on consumer transactions in Europe.

The VAT for digital downloads will be based on the customer’s country of residence instead of being the same across all EU territories.

Tech firms across Europe are preparing themselves – and their customers – to address the new VAT rules. Apple, for example, has written to its millions of iTunes users in Europe informing them of the new EU VAT rules for tech and telecoms firms that will apply from 1 January.

Apple wrote: “On January 1 2015 value-added tax (VAT) rates for apps will change for all territories in the European Union. VAT will be based on the customer’s country of residence instead of being the same across all EU territories.

“Note that prices for apps on the App Store include VAT, while the developer’s proceeds are deducted after VAT is deducted.”

In an attempt to simplify matters in Ireland both the IDA and Revenue are promoting a scheme known as the Mini One Stop Shop (MOSS) so that tech firms will be able to submit VAT returns online in one country – in this case through the Revenue Online Service (ROS) in Ireland rather than across a multitude of countries.

However, concerns have been raised that while large companies like Apple and various telecoms giants have the administrative clout to handle the new VAT rules, small start-ups and individual developers will struggle to accommodate the new VAT rules.

The concern is that thousands of small businesses across Europe will not be able to physically comply with the data requirements.

From boardrooms to the kitchen tables of sole traders

A group called EU VAT Action has warned: “The new EU VAT legislation brings corporate levels of regulation and administration not just to the Boardrooms, but also to the kitchen tables of sole traders.

“Thousands of the smallest businesses cannot physically comply with the data requirements and are faced with a stark choice at the end of this month – either to close their cherished businesses or to break the law. That is not a reasonable choice to force them to make.”

One entrepreneur who has been in touch with Siliconrepublic.com explained the situation from the start-up’s point of view: “All VAT registration thresholds have been removed with this new law – meaning if you sell a single digital PDF to someone in the EU (outside your own EU country) you have to register for VAT.

“To take an example of the knock-on effects of this for small business – this will have a knock on effect to someone making income from web design only in Ireland who also sells maybe a €500 worth of digital goods (like an e-book) to supplement their income.

“If even one of their e-books is sold to another EU consumer this person would be forced to register for VAT on ALL of their business activities even if their web design work wouldn't go above the VAT registration threshold in Ireland – essentially pushing up their prices (reducing their competitiveness) or forcing them to absorb the VAT (pushing them potentially out of business – and this is a reality for many),” the entrepreneur warned.

The creation of the new VAT rules raise many questions and run counter to the stated ambitions of Europe’s Digital Agenda to create a Single European Market for digital goods and services.

If anything the move is likely to fragment Europe further as a digital marketplace and will no doubt frustrate small operators who just want to make an honest living and who see the internet as a window to the world.

Digital Europe image via Shutterstock

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Editor John Kennedy is an award-winning technology journalist.

editorial@siliconrepublic.com